From time to time, I’ll give an overview of one broad MediaShift topic, annotated with online resources and plenty of tips. The idea is to help you understand the topic, learn the jargon, and take action. I’ve already covered blogging, citizen journalism, presidential campaign videos and various other topics. This week I’ll look at online advertising.

Background

The term online advertising refers to ads that are served via the Internet. Early online ads ran on dial-up services such as Prodigy, eventually coming to the World Wide Web in the mid-‘90s as banner ads or graphical pictures embedded onto sites such as the Global Network Navigator (GNN) and HotWired. Rick Boyce, the director of business development at HotWired (the online arm of Wired magazine) at the time, helped push through the first banner ad campaigns in 1994, including the AT&T banner ad pictured here.

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Early banner ad on HotWired

When advertising started to appear on the web, many people were upset that the Internet, which had been developed for military, governmental and educational purposes, would be commercialized. But what HotWired offered to advertisers was a way to track ad performance by “clickthrough rates,” literally counting the times that people clicked on ads. The web has long been hailed as the most trackable medium, especially compared to broadcast TV and radio, because the computer user’s trail of clicks can be tracked closely.

Over time, banner ads became less useful for advertisers as people tuned them out or sought software to block their delivery. This led to an arms race for people’s attention, as advertisers introduced more and more intrusive ads, from blinking banners to pop-up ads to “interstitials” that take over the screen. Advertisers also have branched out into various delivery methods, sending ads via email, through RSS news feeds, to mobile devices, or embedded into online audio and video, including podcasts.

Pay-Per-Click Ads

As advertisers started to push into more colorful, more multimedia “rich media ads” online, a surprisingly simple text ad started to make a huge impact. The idea started with the GoTo.com search engine, which listed search results depending on how companies bid for keywords. The advertisers only paid GoTo.com each time someone clicked through to their site, a system known as pay-per-click (PPC). Even though earlier attempts at commercializing search results had failed, GoTo.com was more successful because they started life as a commercial search engine. Eventually, the site changed its name to Overture and was bought by Yahoo in 2003 for $1.7 billion.

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Google AdWords demo

Meanwhile, Google made a crucial change to the PPC system when it launched its AdWords service in 2000, listing “sponsored links” next to search results. These simple ads consisted of a text headline, a couple short lines and a link, and they eventually proved to be a powerhouse for Google. These ads were successful for three important reasons: 1) They were tied to keywords, which meant that searchers were getting ads that were highly relevant to what they were searching for; 2) advertisers only paid for the times people clicked on the ads; and 3) the popular Google search engine drove huge amounts of traffic to these ads.

But Google had a problem: GoTo.com had patented these types of paid search placements. Eventually Google settled the patent claim with Yahoo, which owned Overture/GoTo, by issuing 2.7 million shares of stock for a perpetual license. Google later branched out and started serving up PPC ads on third-party sites such as online newspapers and blogs through the AdSense network, delivering ads depending on the content of the page, rather than from search results.

Problems have persisted with PPC ads, as some companies will buy keywords using trademarked terms or the name of rival firms in order to divert traffic to their own websites. So far, courts have sided with Google, allowing people to use trademarked terms in PPC ads as long as they are not posing as the rival company and confusing consumers.

The other problem with PPC ads is click fraud, with hackers or rival firms driving up the cost of ads by clicking repeatedly on ads. Google and other search engines downplay the cost of click fraud, but researchers estimate that 10% to 20% of clicks on PPC ads are fraudulent, costing advertisers from $500 million to $1 billion per year.

Measuring the Phenomenon

Over the past few years, online advertising has become a juggernaut, leading all other ad mediums in growth worldwide. Why? As more people get broadband Internet connections, they tend to spend more of their time online and less time with print publications, TV and radio. As the attention of the public shifts to the Internet, advertisers must follow them in order to keep reaching people.

Here are some recent facts, figures and projections for online advertising in the U.S. and around the globe:

> The Internet Advertising Bureau (IAB) and PricewaterhouseCoopers (PwC) found that Internet ad spending in the U.S. hit a new record high in the first quarter of 2007, at $4.9 billion, marking the 10th consecutive record quarter.

> In Europe, online ad spending nearly doubled in 2006 to 8 billion Euros, according to the IAB. Out of 13 countries covered, the UK brought in the most online ad money, with 39% of the total in Europe.

> In 2006, advertisers spent more money online in the UK (2 billion pounds) than in newspapers (1.9 billion pounds). In the second half of the year, Internet ad spending in Britain made up 12.4% of all ads sold, topping the global average of 5.8%.

> ZenithOptimedia predicted that worldwide online advertising revenues would outpace radio ad revenues by 2008.

> PwC predicts the U.S. online ad market will bring in $35.4 billion in 2011.

> PwC predicts Canada will have the highest compounded annual growth rate for online advertising of any country in the world, growing 23.5% each year for the next five years.

> Jefferies & Co. predicted global online ad revenues would surpass $60 billion by 2010.

> eMarketer found that Google, Yahoo, AOL and MSN took in 57.4% of all U.S. Internet ad money in 2006, a percentage it predicts will rise to 66.6% for 2007.

Despite all these rosy projections, it pays to remember that advertising is a cyclical business, and online advertising dropped like a lead balloon after the dot-com bust in 2000.

Challenges

As marketers fall over each other to reach the growing online audience, a host of challenges remain for them. Because online advertising is a new frontier, marketers often find themselves crossing ethical boundaries for users. Email advertising led to spam, or unsolicited email, which has almost ruined the email experience for many people. Advertisers also started using pop-up or pop-under ads that served an ad in a new browser window, forcing people to close the window and view the ad. That led to people using pop-up blocking software, now a standard feature in the Firefox and Intenet Explorer browsers.

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Vibrant Media demo

On the web, the line between editorial and advertising has been fuzzy, both on search engines and on news sites and blogs. A company called Vibrant Media serves up what it calls “in-text advertising” a double-underlined text link from within news stories or editorial content. When you click on the double-underlined word, it brings up an ad related to that phrase. Though that practice is controversial with readers, Vibrant says the number of publishers who use its network has gone up 90%.

Over in the blogosphere, a company called PayPerPost pays bloggers to write positive reviews of products. At first, the company did not require that bloggers explain that they were paid for the mentions, but later they gave in to complaints and required disclaimers. While many bloggers and blog readers were upset with the paid placements, PayPerPost recently received a $7 million round of funding.

Advertisers have had to worry about being associated with these types of ethically challenged ad methods online, along with adware and spyware companies that deliver ads via software that’s loaded onto unsuspecting people’s computers. In one example, ads sold by Yahoo in its search advertising network ended up being served through adware companies unbeknownst to the advertisers. So their ads showed up through adware companies that might have upset viewers — not exactly a good forum for selling or promoting a product.

Advertisers also face the challenge of gauging just how many people have viewed online ads. Tracking ads online is a tricky proposition, despite the Internet’s claim to better trackability. The problem is that it’s difficult to gauge how many unique people are actually viewing an ad, versus the same people viewing the ad multiple times on different computers, or automated Internet spiders or bots that scour the web for search engines.

Innovation

As people stop clicking on banner ads and pay less attention to search-related text ads, marketers have tried out new ways to reach an increasingly saturated-by-advertising audience. Video ads play before you watch online videos on many mainstream news sites, and audio podcasts include ads read by the hosts. Advertisers are also considering ways to send relevant ads to mobile phones, though many people want to get free data or free calls in return for watching ads on cell phones.

To help advertisers target people with relevant ads, firms such as Revenue Science offer “behavioral ads” that are served according to your online browsing history. For instance, if you went onto travel sites looking for good air fares, and then you went to read a story at the Wall Street Journal Online, you would get a banner ad served at WSJ.com touting a travel deal. Though these services have raised privacy issues, even 50% of people who are sensitive about their personal privacy said they would like to get promotions and offers based on their interests and tastes, according to a study by the Ponemon Institute.

As more and more members of the group formerly known as the audience start creating their own media, advertisers have tried to harness that creative energy by asking them to make their own ads for products they love. That strategy worked well for Frito-Lay as it paid a pittance to run a user-generated ad for the last Super Bowl. But the strategy backfired for Chevy, when it asked users to create their own video ads for the Tahoe SUV and people used the platform to criticize the company for promoting gas-guzzling cars.

Terminology

Here are some common terms in the online advertising world:

ad impression: Each time someone views an advertisement online.

ad networks: A company that sells ad inventory in aggregated packages to advertisers. One example of an ad network for blogs is called BlogAds.

banner ad: Graphical advertisement on a web page that allows people to click through to a special advertiser’s site.

behavorial ads: Advertising that’s served up according to a person’s recent online web surfing, matching their interest even if they are not currently on a relevant site.

clickthrough rates (CTR): The percentage of times that a person seeing an ad online clicks on the ad.

cost per action (CPA): A type of ad in which the advertiser only pays the publisher for each time someone completes a transaction, whether that’s registering for a site or buying a product.

cost per thousand (CPM): The rate it costs for the ad to reach a certain number of viewers online. So a site with a $10 CPM would charge $100 for every 10,000 viewers reached.

pay-per-click (PPC): An ad in which the advertiser only pays for each click made by viewers, with the price set by bidding against other advertisers online.

opt-in marketing: Ads or commercial emails sent with the prior approval of recipients.

rich media ads: Display ads online that use animation, flashy graphics, audio or video to pop off the page for viewers.

spam: Commercial email messages sent without the recipient’s approval.

Resources

To read more about the ever-changing world of online advertising, check out these articles, blogs, websites, and research houses:

Articles

Banner ads’ tenth birthday at AdLand

Decade in Online Advertising [PDF File] from DoubleClick

Gadvert — The Changing Face of Online Advertising at TMCNet

How Web Advertising Works at HowStuffWorks.com

Online advertising entry at Wikipedia

Where’d You Go? Advertisers Know at the Globe and Mail

Blogs

Adfreak

Adrants

Adverblog

Jaffe Juice

John Battelle’s Searchblog

MarketingVox

News Sites

Advertising Age’s Digital section

Adweek’s IQ Interactive secion

ClickZ

DMNews’ Internet Marketing section

iMedia Connection

MediaPost

Researchers

comScore

eMarketer

Internet Advertising Bureau

Nielsen/NetRatings

What do you think about online advertising? What types of online ads annoy you and which ones do you welcome? Are there any other excellent sites or blogs you follow for coverage of the online advertising phenomenon? Share your thoughts in the comments below and we’ll update this blog post with any important resources.